What Investors Should Do If They Sold on Black Monday

NEW YORK (MainStreet) — Investors who panicked on Black Monday should jump right back into the market, because a pause often leads to many years of sitting on the sidelines.

Investing in equities remains the “surest way for an individual with a long time horizon to build wealth,” and not miss gains in the market, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.

Many individual investors overreacted in the aftermath of Black Monday and sold a large percentage of their stocks. By the end of the volatile week, all the major indexes reversed their course and erased the massive losses from last Monday.

An investing strategy which is disciplined and consistent will help investors avoid making hasty decisions based on emotions of fear or greed. Dollar cost averaging, which entails investing a fixed amount into the market through a 401(k) or IRA every two weeks or monthly, builds up a retirement portfolio. A low cost equity index mutual fund or ETF is a good option, he recommends.

“There is no time like the presentto get into the market for the first time or to get back into the market,” Johnson said. “The essential part is to maintain the discipline to invest whether the market is up or the market is down.”

The attempts by individual investors to time the market by determining when the market might rise or decline is a “fool's game,” he said.

Instead of trying to follow the herd, which is often motivated by the panic and fear generated from other investors, investors will see their retirement portfolios produce better returns when they have more “time in the market and not timing the market,” Johnson said.

“Long-term investors have the distinct advantage of having time on their side and over time, the stock market advances,” he said.

The market will continue to be volatile in the next few weeks or even months, but getting back into the market “market right away has historically proven to be the best approach,” said Edison Byzyka, vice president of investments for Hefty Wealth Partners in Auburn, Ind.

Staying out of the market for too long means many investors also miss out on the rally when the market bounces back.

“In retrospect, those investors that have missed the first few weeks of a major upside rally have typically taken twice as long to recoup their losses,” he said. It’s understandable that losing money in the short term is not pleasant, but in an effort to recoup your losses, it’s crucial that all emotion is removed from the decision making process.”

Volatility is a natural occurrence of the stock market, and corrections are needed to maintain a stable market. On average, the market produces more positive years than negative ones. Since 1950, the S&P 500 has had 499 up months and 288 down months -- meaning 63.4% of all months have yielded positive return, Johnson said. The S&P 500 generated 51 up years and only 14 down years since 1950 -- meaning 78.5% of years that have been in the black.

While some years are extremely volatile, 1954 experienced the highest return year with an increase of almost 53% while the worst return year was 2008 with a loss of 37%.

“In the last dozen years, the only year with a negative return was 2008,” he said. “The secret to winning the game of investing is playing the game of investing.”

Shifting to more conservative investments in your retirement portfolio is not a good method either, said Johnson.

“Investors become fearful when the market is falling and change their asset allocations from more aggressive or a larger percentage in equity to more conservative or a smaller percentage in stocks,” he said. “This has the perverse effect of having the investor buy high and sell low -- the exact opposite of the old investment maxim.”

The largest issue and danger of waiting for the market to stabilize is that “the market goes up always - it just goes up,” said Patrick Morris, CEO of New York-based HAGIN Investment Management. The market will continue to rise, because earnings growth of companies is positive, “multiples are high due to very low interest rates, but the market has this nasty long term tendency to rise,” he added.

Investors who want to buy and sell more frequently need to be aware that China’s economic woes will be an issue for awhile and the Federal Reserve might start discussing the possibility of a rate hike if the markets “rally strongly enough,” Morris said.

“If you choose to trade in and out, you need to be nimble,” he said. “In the long run, the process of mechanically investing tends to be the winning strategy. I feel like a lot of the selling that happens on down days as dramatic as last Monday tends to be capitulation selling. Unless you are a real day trader, it might make sense to wait a few days until the Fed meeting.”

Expecting the market to rally in the near term is not likely to occur, Morris said.

“I'm not going to say the market can't go higher, but it probably won't test the highs of the year until the Fed meeting passes and China makes a few more stimulus moves,” he said.

Waiting for the right time to get back into the market is a strategy that rarely ever works, said Matthew Tuttle, portfolio manager of the Tuttle Tactical Management U.S. Core ETF in Stamford, Conn.

“When someone is dieting, they will eventually hit a binge and they can either wallow in that and completely blow their diet or dust themselves off and resume the diet the next day,” he said. “It’s the same with doing some dumb investing. You can sit out and probably get back in at the wrong time or you can dust yourself off and resume your plan the next day.”

Instead of capitulating and selling last Monday, investors should have done nothing and waited for the volatility to end, said Andrew Stotz, CEO of Bangkok-based Stotz Investment Research. The majority of people have a long time to save and invest for retirement.

“A 30-year-old retiring at 65 has 35 years to think about investing and another 25 years if they live to be 90,” he said. “That's 60 years that they will be managing their money, so what is happening today means very little in the scheme of things.”